A cryptocurrency exchange is a platform that enables users to trade various currency and cryptocurrency types.
A crypto exchange has a similar interface to a bank or investment firm, but it differs in some notable ways. The exchange acts as a central platform that connects buyers and sellers of various cryptocurrencies. Its primary value is that it offers 24/7 nearly-instant liquidity for many cryptocurrency asset pairs.
Popular exchanges like Coinbase and Gemini hold onto billions of dollars of cryptocurrency, some of which is owned directly by the company, and some is owned by users utilizing the exchange’s cryptocurrency wallet.
There are a few notable distinctions within the cryptocurrency exchange realm, each of which we’ll get into in detail.
- Is the cryptocurrency exchange centralized, or is it completely decentralized?
- Is the exchange custodial or non-custodial?
Here’s what any lawyer, and frankly anyone interacting with the financial world, should know about why selecting the right cryptocurrency exchange makes all the difference.
Is the cryptocurrency exchange centralized, or is it completely decentralized?
As you may have learned reading The Legal Examiner’s The Blockchain: A Guide for Lawyers series, cryptocurrency like Bitcoin is completely decentralized.
This means that there is no central company or entity that is responsible for Bitcoin– there isn’t a fancy San Francisco tech startup office, nor is there a 1-800 number you can dial if things go haywire.
This is in contrast to a centralized exchange, which is a formally established entity that must adhere to guidelines and regulations. Of course, there are